A key witness in the fraud trial of former Goldman Sachs trader Fabrice Tourre said Tuesday she believed hedge fund Paulson & Co. planned to invest in a 2007 mortgage deal at the center of the trial.
The testimony of Laura Schwartz, a former managing director at ACA Capital Holdings Inc., is central to the U.S. Securities and Exchange Commission's case that Tourre misled investors in the deal, known as Abacus 2007-AC1.
The Tourre case, which began last week in federal court in New York, is one of the biggest brought by the SEC over the events leading up to the financial crisis of 2008.
Tourre is to testify Wednesday.
The SEC accuses Tourre of failing to tell investors that Paulson & Co. intended to bet against Abacus. It also claims Tourre misled ACA into thinking Paulson was investing in the deal.
According to the SEC, Paulson & Co. came to Goldman Sachs looking for a way to bet against the subprime mortgage market. They came up with a complex $2-billion security tied to mortgage securities.
When Goldman brought on a subsidiary of bond insurer ACA to help select the mortgage securities underlying Abacus, Tourre allegedly misled ACA into believing Paulson intended to invest in the transaction, not against it.
Schwartz, who now works at the broker-dealer Seaport Group, was the main point of contact with Tourre and Paulson & Co., the SEC says.
"I believed Paulson would be the equity investor in the transaction," Schwartz told the court Tuesday. She said her belief was based in part on discussions with people at Goldman and a document Tourre emailed her summing up the investment.
Goldman Sachs Group Inc., which was a defendant when the case was filed in 2010, settled for $550 million without admitting or denying the allegations. -- Reuters